Question

Question 1

Revenues

Revenue from sales of goods and services .......................... $100,000,000

Operating costs and expenses:

Cost of products and services sold ....................................... $30,000,000

Selling expenses ................................................................... $3,000,000

Administrative expense ........................................................ $4,000,000

Total operating costs and expenses ............................... $37,000,000

Income from operations.............................................................. $63,000,000

Interest expense (corporate bonds & loans) ............................... $500,000

Non-recurring expense (Legal expenses/fines in

settling a federal antitrust suit .............................................. $100,000

Income taxes ............................................................................... $740,000

Net income ................................................................................. $61,660,000

During this year of operation, Bonus Realty owned and occupied an office building in downtown Cleveland. For this year, the building could have been leased to other businesses for $3,000,000 in lease income. Bonus Realty also owned undeveloped land valued at $10,000,000. Owners of Bonus Realty can earn a 4% rate of return annually on funds invested elsewhere.

a. Total explicit costs of using market-supplied resources for Bonus Realty for this year are….



b. Total implicit costs of using owner-supplied resources for Bonus Realty for this year are….


c. Total economic cost is….



d. Bonus Realty’s accounting profit is….

  
e. Economic profit for Bonus Realty is….

Please solve the questions with calculations.

Answer 1

a. Based on the Income Statement presented in the question, the total or overall explicit costs of using only the market supplied material for Bonus Realty for this year would be equal to the costs of products and services sold by the company which is given as $30,000,000 as it represents the overall cost or expense of production incurred by the company during the production of the goods and services by using the resources or factor inputs supplied by the factor markets such as labor, physical capital, land, etc.

b. Bonus Realty owned an office building in downtown Cleveland that could have been leased to other businesses for $3,000,000 and undeveloped land for the value $10,000,000 which could earn a 4% or 0.04 annual rate of return if invested elsewhere. Therefore, the foregone rate of return that the company could have owned by investing the funds elsewhere=(0.04*$10,000,000)=$400,000.

Hence, the total foregone earnings or income or the implicit of Bonus Realty this year=($30,000,000+$400,000)=$30,400,000

c. The total operating costs and expenses are $37,000,000 and the total interest and non-recurring expenses are respectively $500,000 and $100,000. Therefore, the total expenses or costs incurred by the company=($37,000,000+$500,000+$100,000)=$37,600,000. The total revenue obtained by the company from the sale of products and services is given as $100,000,000. Therefore the total accounting cost incurred by Bonus Realty=($100,000,000-$37,600,000)=$62,400,000

In part b. the total implicit cost has been calculated as $30,400,000. The total economic cost incurred by Bonus Realty=($62,400,000-$30,400,000)=$32,000,000

d. The total income taxes paid by Bonus Realty is given as $740,000. The total accounting profit of the company, in this case, would be={$100,000,000-($37,000,000+$740,000)=($100,000,000-$37,740,000)=$62,260,000

e. The total economic profit for Bonus Realty= {$100,000,000-($30,000,000+$30,400,000)}=($100,000,000-$60,400,000)=$39,600,000